Powell’s cautious tone scrambled the market’s expectations for rate cuts in September

• Fed Chair Powell sounded cautious on the outlook for rates after the Fed’s July policy meeting.

• His tone led markets to reprice the odds that the Fed will cut interest rates at the September meeting.

• US stocks dropped and Treasury yields climbed higher as traders digested the remarks.

Federal Reserve Chair Jerome Powell just dimmed the market’s view of a September rate cut.

Heading into the latest Fed meeting, the market widely expected no change to the benchmark rate, but saw solid odds of a cut at the September meeting.

That changed with Powell’s more cautious tone as he reiterated that the central bank is still waiting for clarity on the path of inflation.

Investors started pricing in higher odds that the Fed will keep rates unchanged in September, recalibrating views as Powell spoke at the press conference following Wednesday’s policy decision.

According to the CME FedWatch tool, investors priced in a 51.9% chance that rates would remain at their current level Wednesday afternoon, up from 35.4% on Tuesday.

The odds of the Fed issuing a 25 basis point rate cut that month ticked down to 47.1%, down from 63.3% on Tuesday.

US stocks, which rose earlier in the day, dropped on the news. US Treasury yields also rose higher, with the 10-year US Treasury yield climbing four basis points to trade around 4.368%.

Here’s where US indexes stood at the 4 p.m. closing bell on Wednesday:

Powell signaled that the Fed was comfortable holding interest rates at their current levels until it knows the wider effects of President Donald Trump’s tariffs on inflation and the US economy.

The central bank’s decision drew a rare show of dissent from two Fed Governors, the largest show of disagreement among FOMC officials in 30 years.

“Higher tariffs have begun to show through more clearly to prices of some goods, but their overall effects on economic activity and inflation remain to be seen,” Powell said, speaking to reporters Wednesday afternoon.

“We see our current policy stance as appropriate to guard against inflation risks,” he later added.

To markets, the comments don’t bolster confidence that the Fed will be poised to lower interest rates in the near-future.

Central bankers will be assessing two more months’ worth of inflation and jobs data before recovering to make their next rate decision in September.